If the company has a cash flow of $1,500,000 in the first year after closing and a cash flow of $1,200,000 in the second year after closing, sellers receive the following payments: Bringing an investor into your business can be an exciting and sometimes scary prospect. Often, investors want a significant stake in the company in exchange for their passive cash investment. In order to protect both the current shareholders and the new investor, we will formulate a share purchase agreement for the companies to ensure the health of the company while protecting the interests of the investor. The sales contract may also provide that if the cash flow exceeds USD 2,000,000, the earn-out payment is calculated as follows: an ESOP receives its funding from employer contributions, either in cash or in shares of the company. Since contributions are paid to a package of workers` pension measures, employers can deduct them from their federal and national income taxes. A third-party agent manages the trust that receives the contributions from the ESOP and manages the plan. The agreement defines the data to which the entity must pay its contributions to the agent, as well as the management and date of any contribution to the bonus. In this case, the buyer paid $3,000,000 more than he would have paid without the Earn-out, but his multiplicity of purchase prices would be less than 5 times that he was willing to pay for the company`s future cash flow. Sellers would also have benefited from receiving the additional $3,000,000.
This earn-out formula with a bonus for “excess cash flow” was a good deal for both parties. There are many ways to structure earn-outs, and this is just one example. My point is not that your earn-out will be structured as shown above. My point is rather that buyers are very careful not to pay too much for a company and, therefore, your sales contract will likely involve an Earn-out, especially if no purchase price can be agreed. So if you`re selling to a stranger, you probably can`t pay immediately after the sale and continue. Another inherent risk of a “Till Death do us part” strategy is the risk of disability or premature death. In many small and medium-sized businesses, if the owner is disabled or dies, the business may have to be sold for a fraction of its value. Homeowners can protect themselves from this risk with buy-sell contracts and disability and life insurance, but ESOPs can also play a valuable role. If the sale is structured as a sale of assets, the tax consequences for the seller depend on whether the business is a C company or a pass through unit. Many entrepreneurs expect to pay a long-term capital gains tax on the proceeds of the sale when selling their business and benefit from the tax savings described above. But this is often not the case.
As you can imagine, there are countless variations of the aforementioned agreements and many other types of agreements that Bennett and Bennett can write to protect your company and your shareholders. If the sale is structured as a sale of shares, the tax consequences are the same whether the company is a C-Corporation or an S-Corporation: sellers pay long-term capital gains tax on the amount of proceeds of the sale they receive beyond their tax base. . . .